2. INTRODUCTION TO MANAGERIAL ECONOMICS 8
HOURS Introduction to Economics, Kinds of Economic
Decisions, Significance and applicability of Managerial
Economics in decision making, Role and responsibilities of
Managerial Economics, Economic principles relevant to
managerial decision making, Opportunity cost, Production
possibility curve, Concept of increments and Margin, Discounting
principle, Theory of firm.
3. • Business economics and its role in managerial decision making meaning
–scope –relevance
• Economic problems –scarcity vs choice -basic concepts
in economics- scarcity, choice, resource allocation- trade-off-
opportunity cost
• Marginal analysis - marginal utility theory, law of diminishing marginal
utility
• Production possibility curve
Introduction to managerial economics
4. The word ‘Economics’ originates from the Greek work
‘Oikonomikos’ which can be divided into two parts:
(a)‘Oikos’, which means ‘House’, and
(b)‘Nomos’, which means ‘Management’.
5. “The science that deals with the production, distribution, and
consumption of wealth”
6. Economics is the study of how people allocate their limited resources to
produce and consumer goods and services to satisfy their endless wants
or to maximize their gains.
Economics is “the branch of knowledge concerned with the production,
consumption, and transfer of wealth”.
10. • Also called Business Economics,
• Business economics is the application of economic theory and
methodology to solving business problems
11. Mc Nair and Meriam has Defined:-
“Business economic consists of the use of economic modes of thought to
analyse business situations.”
Siegel Man has defined:-
“The integration of economic theory with business practice for the
purpose of facilitating decision-making and forward planning by
management.”
12. •Managerial economics is a field in applied economics and it integrates
economics theory with business practice.
•It deals with application of economics theory to business management
and helps a business manager in decision making for achieving the
desired result.
14. • (i) Micro Economics: This is considered to be the basic economics. Microeconomics may be
defined as that branch of economic analysis which studies the economic behaviour of the
individual unit, may be a person, a particular household, or a particular firm. It is a study of
one particular unit rather than all the units combined together. The microeconomics is also
described as price and value theory, the theory of the household, the firm and the industry.
Most production and welfare theories are of the microeconomics variety.
• (ii) Macro Economics: Macroeconomics may be defined as that branch of economic analysis
which studies behavior of not one particular unit, but of all the units combined together.
Macroeconomics is a study in aggregates. Hence, it is often called Aggregative Economics. It
is, indeed, a realistic method of economic analysis, though it is complicated and involves the
use of higher mathematics. In this method, we study how the equilibrium in the economy is
reached consequent upon changes in the macro-variables and aggregates. The publication
of Keynes’ General Theory, in 1936, gave a strong impetus to the growth and development
of modern macroeconomics.
15. • (iii) International Economics: As the countries of the modern world are
realising the significance of trade and commerce with other countries, the
role of international economics is getting more and more significant
nowadays.
• (iv) Public Finance: The great depression of the 1930s led to the realization
of the role of government in stabilising the economic growth besides other
objectives like growth, redistribution of income, etc. Therefore, a full
branch of economics known as Public Finance or the fiscal economics has
emerged to analyse the role of government in the economy. Earlier the
classical economists believed in the laissez faire economy ruling out role of
the government in economic issues.
16. • (v) Development Economics: After the Second World War
many countries got freedom from the colonial rule, their
economics required different treatment for growth and
development. This led to emergence of new branch of
economics known as development economics.
• (vi) Health Economics: A new realisation has emerged from
human development for economic
branches like health economics are
growth.
gaining
Therefore,
momentum.
Similarly, educational economics is also coming up.
17. • (vii) Environmental Economics: Unchecked emphasis on economic growth
without caring for natural resources and ecological balance, now, economic
growth is facing a new challenge from the environmental side. Here fore,
Environmental Economics has emerged as one of the major branches of
economics that is considered significa qnt for sustainable development.
• (viii) Urban and Rural Economics: Role of location is quite important for
economic attainments. There is also much debate on urban-rural divide.
Therefore, economists have realised that there should be specific focus on urban
areas and rural areas. Therefore, there is expansion of branches like urban
economics and rural economics.
• Similarly, regional economics is also being emphasised to meet the challenge of
geographical inequalities. There are many other branches of economics that
form the scope of economics. There are welfare economics, monetary
economics, energy economics, transport economics, demography, labour econ
18. 1. Demand Analysis and Forecasting
2. Cost and production Analysis.
3. Pricing Decisions, Policies and
practices.
4. Profit Management.
5. Capital Management
19. Demand analysis helps to identify the various factors influencing the product demand
and thus provides the guideline for manipulating demand.
Demand forecasting : Serve as a guide to management
for maintaining and strengthening market position and enlarging profit
20. 2) Cost and production analysis:
Discovering economic cost and ability to measure
them are the necessary steps for more effective
profit planning and cost control.
3) Pricing decisions, policies and practices:
Pricing is an important area of business economics.
A firms success largely depends on how
correctly the pricing decision are taken.
21. 4) Profit management: Business firms are
generally organized for purpose of
making profit and in the long run profit
earned are taken as an important
measure of the firms success.
5) Capital Management: Capital
management implies planning and
control of capital expenditure. The main
topics dealt with are cost of capital, rate
of return and selection of projects.
22. NATURE OF MANAGERIAL ECONOMICS
1.New Discipline
2.Separate branch of economics
3.Micro in nature
4.Pragmatic
5.Normative science
6.Science of decision making
7.Study of allocation of Resources
23.
24. • Application of traditional economics: Business economics is concerned with those
aspects of traditional economics which are relevant for business decision making in
real life.
• Solving economic problem: Limited volumes of resources give rise to many
economic problems such as what to produce, how to produce and how much to
produce and where to produce . In this situation , business economics assume the
central role. The men behind production and marketing of the products are called the
business people or business executives.
• Variety of business decisions: Business economics helps in reaching
complicated business decisions in a complicated environment.
Example: what product and service should be produced?
what input and production technique should be used ? What are the best size and
locations of new plant ?
25. act as an integrating agent by
such as finance, marketing and
• An integrating agent: Business economics
coordinating the activities in different areas
production.
• Social benefits: It serve as an instrument in achieving economic welfare of the
society through socially oriented business decisions.
26. Business economics assists in the following area of managerial decision making
•Demand decision: Analysis and forecasting of demand for a given product and
service.
• Input-output decision: In this, the costs of inputs in relation to output are
studied to optimize the profits.
• Price -output decision: The pricing policies , methods, strategies and
practices constitute crucial part of the study of managerial economics.
• Investment decisions: Investment decisions are also called capital budgeting
decisions.
•Economic forecasting and forward planning:
27. ALLOCATION OF RESOURCES: SINCE RESOURCES ARE SCARCE AND THEY HAVE
MULTIPLE USES, ME FOCUSES ON OPTIMUM ALLOCATION OF FUNDS AVAILABLE, WHICH
ALSO REDUCES THE WASTAGE LEVEL.
› MICRO ECONOMIC NATURE: M.ECO IS MICRO ECONOMIC IN CHARACTER. IT DEALS
WITH BUSINESS FIRMS. A FIRM IS THE SMALLEST DECISION MAKING UNIT OF
PRODUCTION. SINCE THE STUDY IS ABOUT FIRM,THE PROBLEMS FACED BY THE FIRMS
ALSO FALLS UNDER THE PURVIEW OF MICRO ECONOMICS.
› MARKET KNOWLEDGE: A FIRM IS OPEN TO THREATS AS WELL AS OPPORTUNITIES IN
MARKET PLACE. SO KNOWLEDGE OF MARKET MUST BE PERFECT.
28. › MACRO-SETTING: A FIRM HAS TO OPERATE WITHIN A GIVEN
ECONOMY. SO ITS ALSO GOVERNED & AFFECTED BY THE TRENDS
IN INCOME, CONSUMPTION, INVESTMENT, SAVINGS LEVELS IN AN
ECONOMY.
› Positive & Normative Approach: Positive approach concerns with what
is, was or will be, while normative approach concerns with what ought
to be. Positive eco is of 2 types: Economics description shows state of
operation of the firm at a point of time whereas economic theory
explains why it happened.
29. The concept of Production Function gains importance only
because of paucity of resources. State weather this
statement is true or false and give reasons.
30.
31.
32.
33. • There are two aspects of this central problem—
1. Which Goods Should Be Produced, or what goods should be produced?
An economy wants many things but all these cannotbe produced
with the available resources.
Therefore, an economy has to choose what goods should be produced and what goods
should not be.
General Or Capital Goods; Or Civil Goods Or Defence Goods.
34. 2. what should be the quantities of the goods that are to be produced.
Production of goods depends upon the use of resources.
Hence, this problem is the problem of allocation of resources. If we allocate
more resources for the production of one commodity, the resources for the
production of other commodities would be less
35. • Which technique should be used for the production of given
commodities.
• This problem arises because there are various techniques
available for the production of a commodity
• Such as, for the production of wheat, we may use either more
of labour and less of capital or less of labour or more of
capital.
• With the help of both these techniques, we can produce equal
amount of wheat. Such possibilities exist relating to the
production of other commodities also.
36. • The main objective of producing a commodity is its
consumption in the economy.
• An Economy has to decide as to for whom goods should be
produced.
• This is the problem of distribution of produced goods and
services. Therefore, what goods should be consumed and by
whom depends on distribution of National Product.
37. Assume that you are about to open a new boutique. As a
manager of the shop, what are the immediate economics
questions that come to your mind?
38. • All the three central problems arise because resources are
scarce.
• Had resources been unlimited, these problems would not
have arisen.
• For example, in the event of resources being unlimited, we
could have produced each and every thing we wanted, we
could have used any technique and we could have produced
for each and everybody.
39. • Therefore, every economy faces the problem as to how
resources should be combined for the production of a given
commodity.
The goods would be produced employing those methods and
techniques, whereby the output would be the maximum and
cost of production would be the minimum.
40. 1.The opportunity Cost Principle
2. The incremental Principle
3.The Principle of Time Perspective
4. The Discounting Principle
5.The Equi marginal Principle.
41. Opportunity cost of a decision is the sacrifice of alternatives
required by that decision. Sacrifice of alternatives is involved
when carrying out a decision requires using a resource that
is limited in supply with the firm. Opportunity cost, therefore,
represents the benefits or revenue forgone by pursuing one
course of action rather than another.
42. 1. The calculation of opportunity cost involves measurement
of sacrifices.
2.Sacrifices may be monetary or real.
3.The opportunity cost is called as cost of sacrificed
alternatives.
43. the concept of opportunity cost occupies an important place.
The economic significance of opportunity cost is as follows:
1. It helps in determining relative prices of different goods.
2. It helps in determining normal remuneration to a factor of
production.
3. It helps in proper allocation of factor resources.
44. The incremental concept is probably the most important
concept in economics and is certainly the most frequently
used in Managerial Economics. Incremental concept is
closely related to the marginal cost and marginal revenues of
economic theory.
The two major concepts in this analysis are:
a) incremental cost and
b) incremental revenue.
45. Incremental cost denotes change in total cost,
whereas incremental revenue means change in total
revenue resulting from a decision of the firm.
46. A decision is clearly a profitable one if
(i) It increases revenue more than costs.
(ii) It decreases some cost to a greater extent than it
increases others.
(iii) It increases some revenues more than it decreases
others.
(iv) It reduces costs more than revenues.
47. Labour Rs. 3,000
Materials Rs. 4,000
Overhead charges Rs. 3,600
Selling and administrative expenses Rs. 1,400
Full Cost Rs.12, 000
48. The order appears to be unprofitable. For it results in a loss of Rs. 2,000.
However, suppose there is idle capacity which can be utilised to execute this
order. If order adds only Rs. 1,000 to overhead charges, and Rs. 2000 by
way of labour cost because some of the idle workers already on the pay roll
will be deployed without added pay and no extra selling and administrative
costs, then the actual incremental cost is as follows:
Labour Rs. 2,000
Materials’ Rs. 4,000
Overhead charges Rs. 1,000
Total Incremental Cost Rs. 7,000
Thus there is a profit of Rs. 3,000. The order can be accepted on the basis
of incremental reasoning. Incremental reasoning does not mean that the
firm should accept all orders at prices which cover merely their incremental
costs.
49. The concept is mainly used by the progressive concerns.
Even though it is a widely followed concept, it has certain
limitations:
(a) The concept cannot be generalised because observed
behaviour of the firm is always variable.
(b) The concept can be applied only when there is excess
capacity in the concern.
(c) The concept is applicable only during the short period.
